MAC3701 ASSIGNMENT 2

SEMESTER 2 OF 2022

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MAC3701 ASSIGNMENT 2 – SEMESTER 2 OF

2022
(a) Calculation of Production Units

Multi = [(120 000 * 10) + (120 000 * 1.15 * 2)] = 1 476 000
Ultra = [(51 000 * 10) + (51 000 * 1.15 * 2)] = 627 300

Production batch set – up costs

Number of set ups

Set ups
1 476 000
Multi ( 2 000 ) 738
627 300
Ultra ( ) 492
1 275
1 230

Production batch set – up costs OAR = 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠

𝑇𝑜𝑡𝑎𝑙 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠𝑒𝑡 𝑢𝑝𝑠

7 990 080
=
1 230

= 𝑅6 496 𝑝𝑒𝑟 𝑠𝑒𝑡 𝑢𝑝

Rental of factory space

Machine hours

Set ups
Multi (738 * 1.5) 1 107
Ultra (492 * 1.7) 836.4
1 943.4

Rental of factory space costs OAR = 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠

𝑇𝑜𝑡𝑎𝑙 𝑀𝑎𝑐ℎi𝑛𝑒 𝐻𝑜𝑢𝑟𝑠

23 758 065
=
1 943.4

= 𝑅12 225 𝑝𝑒𝑟 𝑚𝑎𝑐ℎi𝑛𝑒 ℎ𝑜𝑢𝑟

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Permanent manufacturing staff salaries

Direct labour hours

Hours
5.40
Multi (1 476 000 * ) 132 840
60
10.80
Ultra (627 300 * ) 112 914
60
245 754

Rental of factory space costs OAR = 𝑇𝑜𝑡𝑎𝑙 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑𝑠

𝑇𝑜𝑡𝑎𝑙 𝑀𝑎𝑐ℎi𝑛𝑒 𝐻𝑜𝑢𝑟𝑠

8 797 990
=
245 754

= 𝑅35. 80 𝑝𝑒𝑟 𝑚𝑑i𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑢𝑟 ℎ𝑜𝑢𝑟

Allocation of Fixed Manufacturing overheads

Multi Ulta
R R
Production line batch set up cost [(6 496 * 738); (6 496 * 492) 4 794 048 3 196 032
Rental of storage warehouse [(13 200 000 * 60%); (13 200 000 * 40%)] 7 920 000 5 280 000
Rental of factory [(1 107 * 12 225); (836.4 * 12 225)] 13 533 075 10 224 990
Permanent manufacturing staff salaries [(132 840 * 35.80); (112 914 * 35.80)] 4 755 672 4 042 321
31 002 795 22 743 343

(b) Support

As it uses a single cost driver to allocate overheads it is less expensive to implement

andoperate compared to ABC and it is easier to understand and apply.

Opposition

Allocation is based on a volume measure which does not necessarily represent

cause – and – effect relationships between costs and allocation leading to less
accuracy especially where multiple products are produced and production processes
are complex

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(c) Budgeted Statement of Profit or Loss for DeepC for the 2023 financial year

Multi Ultra Total

R R R
Sales [(240 * 2 100 000 * 70%); (470 * 2 100 000 * 30%)] 352 800 000 296 100 000 648 900 000
Less Cost of Sales (201 778 885) (229 776 009) (431 554 894)
Opening inventory [(18 000 * 130); (7 000 * 350)] 2 340 000 2 450 000 4 790 000
Add Production cost 202 735 395 228 895 033 431 630 428
Direct raw material [(1 476 000 * 100); (627 300 * 300)] 147 600 000 188 190 000 335 790 000
Direct labour [(132 840 * 95); (112 914 * 95)] 12 619 800 10 726 830 23 346 630
Variable manufacturing overhead [(6 400 * 7 084 800 5 352 960 12 437 760
1 107); (6 400 * 836.4)]
Packaging [(1 476 000 * 3); (627 300 * 3)] 4 428 000 1 881 900 6 309 900
Fixed manufacturing overheads 31 002 795 22 743 343 53 746 138

Less Closing Inventory (C1) (3 296 510) (1 569 024) (4 865 534)

Gross Profit 151 021 115 66 323 991 217 345 106
Less Expenses (5 439 000) (2 331 000) (135 850 000)
1
Variable selling and distribution costs *(38 850 000 * * 5 439 000 2 331 000 7 770 000
5
1
70%) ; (38 850 000 * * 30%)+
5
Fixed administrative costs 97 000 000
4
Fixed selling & distribution costs (38 850 000 * ) 31 080 000
5

Net Profit 145 582 115 63 992 991 81 495 106

Calculations

C1. Closing Inventory

Closing inventory units

Multi Ultra
Units Units
Opening inventory 18 000 7 000
Add Production 1 476 000 627 300
Less Sales [(2 100 000 * 70%); (2 100 000 * 30%)] (1 470 000) (630 000)
Closing inventory 24 000 4 300

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Closing inventory value

202 735 395
Multi =( * 24 000) = 𝑅3 296 510
1 476 000

228 895 033

Ultra =( * 4 300) = 𝑅1 569 024
627 300

(d) Calculation of contribution per unit

Multi Ultra
R R
Selling price 240 470
Less Variable cost per unit (120.05) (332.33)
Direct raw material 100 300
5.40 10.80
Direct labour *( * 95) ; ( * 95)+ 8.55 17.10
60 60
Variable manufacturing overhead
6 400 * 1.5 6 400 * 1.7
4.80 8.53
*( ); ( 1 275 + )
2 000
Plastic container 3 3
7 770 000
Variable selling & distribution costs ( 3.70 3.70
2 100 000)

Contribution per unit 119.95 137.67

Weighted Contribution per unit = [(119.95 * 70%) + (137.67 * 30%)]

= 𝑅125. 27

Break – even point = 𝑇𝑜𝑡𝑎𝑙 𝐹i𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠

𝖶𝑒igℎ𝑡𝑒𝑑 𝐶𝑜𝑛𝑡𝑟i𝑏𝑢𝑡i𝑜𝑛 𝑝𝑒𝑟 𝑢𝑛i𝑡

(53 746 135 + 97 000 000 + 31 080 000)

=
125.27

= 1 451 474

Break – even point (Ultra) = (1 451 474 * 30%)

= 435 443 𝑢𝑛i𝑡𝑠

Margin of safety (Ultra) = [(2 100 000 * 30%) − 435 443]

= 194 557 𝑢𝑛i𝑡𝑠

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(e) MEMORANDUM

To: Financial Director: Deepc

From: ………
Date: ……….
Subject: Social, ethical and environmental matters

Listed below are the social, ethical and environmental matters of concern pertaining
to your company.

(i) The empty containers are dumped near a children playground which poses
dangers to the health and life of the children considering that chemicals used
are highly corrosive and release harmful fumes;
(ii) It is wrong to be associated with a company which does not adhere to laws
and regulations as the image of the company may be tarnished. The dumping
site used is cleaned by WrongCrowd (Pty) Ltd which has been fined
numerous times for illegal dumping;
(iii) There is conflict of interest as the chief executive officer of DeepC is the
majority shareholder of WrongCrowd (Pty) Ltd. This attitude of the
WrongCrowd casts doubt on the integrity of the Chief Executive Officer;
(iv) The company uses significant quantities of water which can contribute to
water shortages. The company should control the usage of water and use
reasonable quantities;
(v) The company uses plastic containers which can increase pollution. The
company can find other packaging method which can be less damaging to the
environment.

(f) Variances

(i) Sales margin volume variance

Product Actual Budgeted Difference Standard Variance

Sales Sales Gross
Volume Volume Profit
Units Units Units R R
Multi 121 000 122 500 (1 500) 90 (135 000) A
Ultra 53 200 52 500 700 115 80 500 F
54 500 A

Budgeted sales volume

2 100 000
Multi =( * 70%) = 122 500
12

2 100 000
Ultra =( * 30%) = 52 500
12

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(ii) Direct labour efficiency variance

Product Standard Actual Difference Standard Variance

Work Work Work Hour
Hours Hours Rate
Units Units Units R R
Multi 9 969.12 11 883.48 (1 914.36) 103.26 (197 677) A
Ultra 8 230.32 7 007.7 1 222.62 103.26 126 248 F
71 429 A

Standard work hours

5.4
Multi = (120 400 * * 92%) = 9 969. 12
60
10.8
Ultra = (49 700 * * 92%) = 8 230. 32
60

Actual work hours

6.3
Multi = (120 400 * * 94%) = 11 883. 48
60
9
Ultra = (49 700 * * 94%) = 7 007. 7
60

95
Standard work hour rate =( ) = 103. 26
0.92

(iii) Variables sales and distribution cost volume variance

= (𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑆𝑎𝑙𝑒𝑠 𝑈𝑛i𝑡𝑠 − 𝐴𝑐𝑡𝑢𝑎𝑙 𝑆𝑎𝑙𝑒𝑠 𝑈𝑛i𝑡𝑠) * 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑅𝑎𝑡𝑒
= [(52 500 − 49 700) * 3.70]
= 𝑅10 360 𝐹

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(g) Special order

(i) Availability of capacity

Machine
Hours
Available machine hours 192
Hours required for normal production (158)
120 000 90
Multi ( 2 000 * 1.5)
51 000
Ultra ( * 1.7)
1 275 68

Excess capacity 34
60 000 1.5
Hours required for special order ( * ) (1.5)
30 2 000
32.5

Conclusion

DeepC will have sufficient capacity to produce the special order

(ii) Calculation of Special order price

R
60 000 5.40 * 1.05
Direct labour – incremental cost ( * * 95) 17 955
30 60
60 000
Variable manufacturing overheads – incremental cost ( * 4.80)
30 9 600
60 000
Direct raw materials – incremental cost ( * 100) 600 000
10
60 000 15
Fragrance – incremental cost ( 5 * 1 000
* 340) 61 200
Barrels – original purchase price – sunk cost -
60 000
Barrels – selling price (opportunity cost) ( 30 * 10) 20 000
Permanent staff memmber salary – committed cost -
Relevant cost 708 755
Profit (708 755 * 30%) 212 627
Total special order price 921 382

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(iii) Factors to consider before accepting special order

➢ The ability of the company to deliver the desired quality;

➢ The reliability of the supplier of the unique fragrance in terms of delivery
and quality;
➢ The availability of the required labour skills to produce the product;
➢ The possible compromise on the normal duties performed by the
permanent staff member who will be spending 25% of his normal time on
this special order; and
➢ Possibility of getting more business in future from Mohlodi.

(h) Risks due to water shortages

➢ Disruptions to production activities resulting in failure to produce adequate

products as the company`s production activities use a significant quantity of
water;
➢ Outbreak of diseases when water is not available as asanitary activities will not
be sufficiently adhered to; and
➢ The cleaning of the dumping area may not be carried out on time resulting in
exposure of employees, clients, community and other stakeholders being
exposed to health risks which might even be fatal. This can have legal
repurcussions and financial implications as the company may have to settle
damages.

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